On September 27, 2019, FERC approved CAISO tariff revisions to its voluntary Capacity Procurement Mechanism (“CPM”) and mandatory Reliability-Must-Run (“RMR”) framework such that all backstop procurement from resources that would otherwise retire or mothball will be addressed through CAISO’s RMR provisions. While FERC has traditionally considered RMR contracts as measures of last resort, FERC found it just and reasonable for CAISO to expand its use of such contracts to address evolving operational needs due, in part, to the increased penetration of variable energy resources in California. Commissioner Glick partially dissented, arguing that the approved tariff changes essentially provide CAISO “unchecked authority” to enter into out-of-market contracts to meet its resource adequacy needs.

Although CAISO generally relies on its CPM provisions to provide backstop capacity procurement authority, both the CPM and the RMR construct enable CAISO to provide capacity payments for resources needed for reliability purposes that might otherwise retire. In a filing submitted to FERC in April 2019, CAISO proposed to expand its use of mandatory RMR contracts to be the primary mechanism by which to address reliability impacts from retiring generators. Specifically, CAISO proposed to: 1) eliminate the voluntary “risk of retirement” CPM provision, which permits CAISO to procure capacity at market rates from a non-resource adequacy resource that would otherwise retire, but was determined by CAISO to be needed for reliability reasons the following year; 2) enable CAISO to dispatch RMR resources to address system-wide reliability needs, rather than just local reliability needs; 3) offer a longer timeline for resources considering retirement; 4) subject RMR resources to a “must offer” obligation and require participation in CAISO’s Resource Adequacy Availability Incentive Mechanism (“RAAIM”); 5) remove the “hardwired” 12.25 percent rate of return from RMR cost-based compensation in favor of resource-specific, cost-justified rates of return; and 6) allocate RMR costs (and credits) to load serving entities instead of transmission customers.

Chairman Chatterjee and Commissioner McNamee, acting as a majority of FERC Commissioners, generally found CAISO’s proposal to be just and reasonable due to the “unique operational needs” stemming from escalating gas-fired generator retirements and evolving resource integration onto the CAISO-controlled grid. The majority largely rejected arguments that allowing the expanded use of RMR contracts (with associated full cost-of-service compensation) and longer timelines for generators considering retirement would incent such retirements to distort market prices. FERC noted various existing and proposed CAISO tariff protections against “toggling” between RMR compensation and market-based pricing. FERC accepted CAISO’s proposal to impose “must offer” obligations on RMR resources and require RAAIM participation, noting that such requirements would ensure CAISO’s ability to meet reliability needs whenever they arise and that such benefits would outweigh any potential price impacts. FERC also accepted CAISO’s proposal to allocate RMR costs to load-serving entities rather than transmission customers, explaining that even though transmission solutions often mitigate reliability needs, ratepayers are the ultimate beneficiaries, and costs are more appropriately allocated based on proportionate use of the system. Finally, the majority accepted removing the “hardwired” 12.25 percent rate of return, noting that such a rate was implemented nearly 20 years ago, and does not reflect current economic and business conditions at the time an RMR agreement is filed.

In a separate opinion, Commissioner Glick partially dissented and criticized the majority’s decision as departing from established FERC precedent and granting CAISO “near-carte blanche discretion to enter into out-of-market contracts without review by the Commission.” Commissioner Glick argued that although the RMR framework may be necessary to address discrete, near-term reliability challenges, the majority’s decision enables CAISO to utilize such mandatory contracts more frequently and avoid resource-neutral, market-based mechanisms that would enhance reliability at lower costs.

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